Searching for Efficiency in Cash Management via ‘on-behalf-of’ Structures

Treasury has assumed the role of key partner to other business units to manage working capital. Centralisation of treasury operations has been the focus. Globalisation and digitalisation have narrowed gaps between time zones and geographies, and enabled immediate availability of information.

Adopting suitable policies and technologies, treasury operations have been centralised, and funds flow and attendant risks from local business units managed by the global/ regional treasurer. Treasury has gradually evolved as an intermediary between internal business, and external counterparties such as subsidiaries and banks.

Having achieved efficiency through centralisation, global and regional treasurers are now looking to explore the next level of working capital efficiencies, gain better control over counterparties and risk management through bank account rationalisation, and inter-company funding as well as cash pooling.

Payments-on-behalf-of (POBO) and collections-on-behalf-of (COBO) structures have been conceived to help achieve this objective.

Key Constituents of POBO and COBO

The basic principles of POBO and COBO are the centralisation of accounts payables (A/P), accounts receivables (A/R), inter-company transfers, liquidity management, and foreign exchange (FX) requirements.

The centralisation of these business functions allows multinational firms to establish a global corporate cash management structure. Corporates can avoid duplication of these functions across different regions and generate financial savings through economies of scale. This trend is also reflected in the continued establishment of a centralised transaction infrastructure such as payment/collection factories, in-house banks (IHB) and shared-service centres (SSCs). Regulatory changes like the single euro payments area (SEPA) and messaging standards like ISO 20022 are conducive to ‘on-behalf-of’ structures.

On the road to achieving centralisation, corporates can take up the establishment of payment/collection factories and IHBs in a phased manner. Each corporate has to evaluate the quantitative and qualitative benefits vis-a-vis its business model before implementing ‘on-behalf-of’ structures. Multinational and regional banks, with their multi-country presence and technological advancement are in an enviable position to offer the solution to treasuries.

Primary Drivers of ‘on-behalf-of’ Structures 

The promise of improved visibility and control over cash are the key drivers for creation of payment/collection factories by corporates. The following events and regulatory initiatives act as enablers of ‘on-behalf-of’ structures:

• SEPA Credit Transfers (SCTs) and SEPA Direct Debits (SDDs): provide pan-European standardised payment and collection formats, thus enabling centralisation of A/P and A/R across the region.
• Standardisation of bank connectivity and file formats: for example, SWIFT and ISO20022, which is also the mandatory messaging format for the SEPA.
• Automation: creates efficiencies by centralising and automating commercial and financial payments.
• Regulatory changes: for example, the Payment Services Directive (PSD).
• Technological advances: global and regional cash management platforms offered by banks to corporates for efficient routing of cash.
• Multinational firms aiming to save on the cost of cash, reduce financial risk and shorten the balance sheet are another driver for POBO and COBO adoption.

Implementing POBO and COBO Structures 

POBO: To process payments-on-behalf-of, business units send details of their A/P to the designated global/regional treasury for actual execution of the payment obligations. The global/regional treasury then records this as a receivable from the requesting business unit, and depending on the situation and need, may book this as an inter-company loan. With this agreement, the global/regional treasury can then deal with a global or regional bank for processing these accounts payables. The individual business units do not need a direct banking relationship and individual bank accounts for these payments. Such structures supporting payments-on-behalf-of present a unique opportunity to further streamline the payables process and achieve an optimum cash management structure, as they naturally force the business unit to sweep all of its cash to a designated central account.

COBO: In the case of collections-on-behalf-of structures, the business unit instructs its customers (debtors) to remit their payments to a designated central account owned and operated by the global/regional treasury. These A/Rs of the business unit collected by the global/regional treasury will be booked as an inter-company loan from the business unit to the global/regional treasury. The business unit may consider this exposure as an investment.

Netting and IHBs: In a situation where both POBOs and COBOs are in place, further efficiencies can be achieved through a netting mechanism, whereby only the net position is squared off on a pre-agreed settlement date.

This has led to the establishment of in-house banks (IHBs), which act as a single legal entity, within which all of the underlying business units will perform their financial transactions. IHBs being comprehensive in scope, facilitate transfer of risk and its management from local business units to better equipped global/regional treasury.

Global and regional banks are offering web-based cash management applications for efficient management of cash and liquidity. These applications provide interfaces both within, as well as between banks and firms.

Value Delivered to Corporates

Centralised approaches to payment and collection activities through the implementation of ‘on-behalf-of’ structures allow the corporate to achieve a regional or global cash management structure. Benefits include:

1. Standardisation and efficiencies such as higher straight-through-processing (STP) via payment factories and the like. This results in consistency in payment processes, enabling automation, higher STP rates, and resultant cost reduction, plus reduced manual activities increase accuracy and processing speed.
2. Transactional and operational cost reduction via the consolidation of banking relationships, which results in lower banking charges. It also means lower FX charges (lower bid offer spread) and payment processing costs with the consolidation of payment flows; higher volumes of transactions providing negotiation power to the corporate for lower transaction-based fees; consolidated supplier visibility enabling better supply chain management and cost negotiation.
3. Improved cash visibility and control via visibility over internal payment and control over funding arrangements leading to the optimisation of liquidity. Additionally, easier reporting for internal and regulatory purposes is possible as payment information becomes available centrally and fraud reduction through process management, visibility and implementation of control policies is achievable.
4. Enhanced liquidity forecasting and planning via greater visibility over cash and consolidation of banking relationships. Also the reduction in the number of bank accounts at a local level, allows corporates to align payment strategies with improved cash flow forecasting.

Jurisdictional Requirements

A world-class global or regional cash management function would consist of a closely connected payment factory, application of a currency centre principle with a global cash management bank, an IHB and a global overlay structure.

However, country restrictions besides banking relationships need to be considered for a complete rollout of such an idealised cash management structure.

Implementation Challenges

Though many corporates realise and recognise that implementation of ‘on-behalf-of’ structures provide them with greater visibility and control over their cash, there are challenges around data transmission to suppliers and banks.

This challenge can be addressed through the adoption of standards such as SWIFT, SEPA payment instruments or ISO 20022 for notifying banks of the payment instructions. From a Europe, Middle East and African (EMEA) perspective, SEPA is a significant enabler in the transmission of information to the end-client, enabling corporates and their suppliers to reconcile payments more efficiently and quickly.

Realising the benefits

Implementation of ‘on-behalf-of’ structures is neither trivial nor straight-forward. There is no ‘one size fits all’ solution. Corporates need to build and develop a business case for implementing ‘on-behalf-of’ structures. Identification and analysis of quantitative benefits such as reduction in bank fees, improvement in working capital performance and reduction in IT maintenance costs, as well as qualitative factors such as risk-management, compliance benefits and standardised processes and procedures are important. Corporates need a good understanding of the tax, legal and regulatory environments in which they operate.

To summarise, the implementation of ‘on-behalf-of’ structures do provide corporate treasuries with better visibility and control over cash, as well as centralisation of payments and cost savings. The approach streamlines operations with a reduction in multiple banking relationships. Through this corporate treasuries should achieve the next level of efficiency in working capital management.

Multinational firms require global or regional banking partners who can cater to their multi-country operational requirements, provide expertise and understanding to help implement ‘on-behalf-of’ structures. These banks are also under pressure to provide a robust payment solutions platform to enable their corporate customers to achieve their ideal global cash management structure. The time is ripe for corporates to move to the next level of cash management.

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